UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6666
SALANT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3402444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1114 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 221-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by section
12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan
confirmed by a court. Yes X No
As of May 11, 1998, there were outstanding 14,964,608 shares of the Common Stock
of the registrant.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Comprehensive Income
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
<TABLE>
<CAPTION>
Salant Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended
April 4, March 29,
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 84,887 $ 88,209
Cost of goods sold 67,977 68,422
Gross profit 16,910 19,787
Selling, general and
administrative expenses (17,116) (20,555)
Royalty income 1,121 1,107
Goodwill amortization (470) (470)
Reversal of provision for restructuring (Note 5) 160 754
Other income 61 117
--------- ---------
Income from continuing operations before
interest and income taxes 666 740
Interest expense, net 3,960 3,435
--------- ---------
Loss from continuing operations
before income taxes (3,294) (2,695)
Income taxes 3 42
--------- ---------
Loss from continuing operations (3,297) (2,737)
Loss from discontinued operations -- (773)
--------- ---------
Net loss $ (3,297) $ (3,510)
========= =========
Basic loss per share:
Loss per share from continuing operations $ (0.22) $ (0.18)
Loss per share from discontinued operations -- (0.05)
-------- ---------
Basic loss per share $ (0.22) $ (0.23)
========= =========
Weighted average common stock outstanding 15,170 15,041
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Salant Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended
April 4, March 29,
1998 1997
------- --------
<S> <C> <C>
Net loss $ (3,297) $ (3,510)
Other comprehensive income, net of tax:
Foreign currency translation adjustments 3 11
-------- --------
Comprehensive income $ (3,294) $ (3,499)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Salant Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
April 4, January 3, March 29,
1998 1998 1997
(Unaudited) (*) (Unaudited)
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,683 $ 2,215 $ 1,259
Accounts receivable, net 51,329 45,828 45,201
Inventories (Note 3) 97,274 96,638 109,900
Prepaid expenses and other current assets 5,808 4,218 3,494
Net assets of discontinued operations -- -- 7,471
---------- ---------- ----------
Total current assets 156,094 148,899 167,325
Property, plant and equipment, net 25,743 26,439 26,959
Other assets 57,153 58,039 59,189
---------- ---------- ----------
Total assets $ 238,990 $ 233,377 $ 253,473
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 44,625 $ 33,800 $ 32,921
Accounts payable 24,973 27,746 32,963
Accrued liabilities 18,568 16,503 14,432
Current portion of long term debt 104,879 104,879 --
Reserve for business restructuring (Note 5) 1,582 2,764 2,049
---------- ---------- ----------
Total current liabilities 194,627 185,692 82,365
Long term debt -- -- 104,879
Deferred liabilities 5,354 5,382 9,114
Shareholders' equity
Common stock 15,405 15,405 15,339
Additional paid-in capital 107,249 107,249 107,142
Deficit (78,532) (75,235) (60,657)
Accumulated other comprehensive income (Note 4) (3,499) (3,502) (3,095)
Less - treasury stock, at cost (1,614) (1,614) (1,614)
---------- ---------- ----------
Total shareholders' equity 39,009 42,303 57,115
---------- ---------- ----------
Total liabilities and shareholders' equity $ 238,990 $ 233,377 $ 253,473
========== ========== ==========
</TABLE>
(*) Derived from the audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Salant Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended
April 4, March 29,
1998 1997
-------- --------
Cash Flows from Operating Activities:
<S> <C> <C>
Loss from continuing operations $ (3,297) $ (2,737)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation 1,158 1,140
Amortization of intangibles 1,227 1,013
Change in operating assets and liabilities:
Accounts receivable (5,501) (5,068)
Inventories (636) (11,403)
Prepaid expenses and other current assets (1,590) 375
Other assets 6 (18)
Accounts payable (2,773) 5,401
Accrued liabilities and reserve for
business restructuring 1,002 (4,429)
Deferred liabilities (28) (1,101)
-------- --------
Net cash used in continuing operating activities (10,432) (16,827)
Cash used in discontinued operations (119) (1,255)
-------- --------
Net cash used in operations (10,551) (18,082)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (462) (2,970)
Store fixture expenditures (347) (1,093)
-------- --------
Net cash used in investing activities (809) (4,063)
-------- --------
Cash Flows from Financing Activities:
Net short-term borrowings 10,825 25,244
Retirement of long-term debt -- (3,372)
Exercise of stock options -- 23
Other, net 3 11
-------- --------
Net cash provided by financing activities 10,828 21,906
-------- --------
Net decrease in cash and cash equivalents (532) (239)
Cash and cash equivalents - beginning of year 2,215 1,498
-------- --------
Cash and cash equivalents - end of quarter $ 1,683 $ 1,259
======== ========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 1,195 $ 6,493
======== ========
Income taxes $ 3 $ 42
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
SALANT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in Thousands of Dollars, Except Share Data)
(Unaudited)
Note 1. Financial Restructuring
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
At April 4, 1998 and January 3, 1998, the 10 1/2% Senior Secured Notes due
December 31, 1998 (the "Senior Secured Notes") in the amount of $104,879 have
been classified as a current liability. At April 4, 1998, the Company's current
liabilities exceeded its current assets by $38,693. This factor may indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time.
On March 3, 1998, the Company announced that it had reached an agreement in
principle (the "Restructuring Agreement") with its major note and equity holders
to convert its existing indebtedness under the Senior Secured Notes into common
equity (the "Debt Restructuring"), as further described in the 1997 Annual
Report on Form 10-K and the Registration Statement on Form S-4, filed on April
22, 1998. Consummation of the Debt Restructuring is subject to various
conditions, and there can be no assurance that the Debt Restructuring will be
consummated. If the Company is not able to consummate the Debt Restructuring, it
will be unable to continue its normal operations without obtaining additional
financing or pursuing alternative restructuring strategies.
In contemplation of the Debt Restructuring, the Company elected not to pay the
interest payment of approximately $5,500 that was due and payable under the
Senior Secured Notes on March 2, 1998, subject to a 30 day grace period. Because
the Company elected not to pay the interest due on the Senior Secured Notes by
the expiration of the applicable grace period, an event of default occurred with
respect to the Senior Secured Notes, entitling the holders to accelerate the
maturity thereof. On April 8, 1998, the Trustee under the indenture governing
the Senior Secured Notes (the "Indenture") issued a Notice of Default stating
that as a result of the Company's failure to make the interest payment due on
the Senior Secured Notes, an event of default under the Indenture had occurred
on April 1, 1998. If holders of at least 25% in aggregate principal face amount
of the Senior Secured Notes accelerate all outstanding indebtedness under the
Senior Secured Notes pursuant to the terms of the Indenture, such acceleration
could result in the Company becoming subject to a proceeding under the Federal
bankruptcy laws.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
<PAGE>
Note 2. Basis of Presentation and Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Salant Corporation ("Salant") and subsidiaries (collectively,
the "Company").
The Company's principal business is the designing, manufacturing, importing and
marketing of apparel. The Company sells its products to retailers, including
department and specialty stores, national chains, major discounters and mass
volume retailers, throughout the United States.
The results of operations for the three months ended April 4, 1998 and March 29,
1997 are not necessarily indicative of a full year's operations. In the opinion
of management, the accompanying financial statements include all adjustments of
a normal recurring nature which are necessary to present fairly such financial
statements. Significant intercompany balances and transactions have been
eliminated in consolidation. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
annual report to shareholders for the year ended January 3, 1998.
Loss per share is based on the weighted average number of common shares
(including, as of April 4, 1998 and March 29, 1997, 205,854 and 323,878 shares,
respectively, anticipated to be issued pursuant to the Company's 1993 bankruptcy
plan of reorganization). Loss per share for the first quarters of 1998 and 1997
did not include common stock equivalents, including 1,319,393 and 1,430,140
stock options, respectively, inasmuch as their effect would have been
anti-dilutive.
Note 3. Inventories
<TABLE>
<CAPTION>
April 4, January 3, March 29,
1998 1998 1997
<S> <C> <C> <C>
Finished goods $ 57,859 $ 52,010 $ 65,752
Work-in-Process 21,344 21,405 17,516
Raw materials and supplies 18,071 23,223 26,632
---------- ---------- ----------
$ 97,274 $ 96,638 $109,900
======== ======== ========
</TABLE>
<PAGE>
Note 4. Accumulated Other Comprehensive Income
<TABLE>
<CAPTION>
Foreign Currency Minimum Pension Accumulated Other
Translation Liability Comprehensive Income
Adjustments Adjustment
1998
<S> <C> <C> <C>
Beginning of year balance $6 $(3,508) $(3,502)
Current period change 3 -- 3
- - ----------- -- ------------ -
End of quarter balance $9 $(3,508) $(3,499)
== ======== ========
1997
Beginning of year balance $76 $(3,182) $(3,106)
Current period change 11 -- 11
- -- ----------- -- ---------- --
End of quarter balance $87 $(3,182) $(3,095)
=== ======== ========
</TABLE>
Note 5. Division Restructuring Costs
In the first quarter of 1997, the Company reversed a previously recorded
restructuring provision of $754. The provision was for net liabilities related
to the closure of the JJ. Farmer sportswear product line. These net liabilities
were settled for less than the carrying amount, resulting in the reversal of the
excess portion of the provision.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
First Quarter of 1998 Compared with First Quarter of 1997
Net Sales
The following table sets forth the net sales of each of the Company's
principal business segments for the three months ended April 4, 1998 and March
29, 1997 and the percentage contribution of each of those segments to total net
sales:
<TABLE>
<CAPTION>
Percentage
Three Months Ended Increase/
April 4, 1998 March 29, 1997 (Decrease)
------------------- -------------------- ----------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Men's Apparel (a) $77.0 91% $83.8 95% (8.2%)
Children's Sleepwear and Underwear 7.9 9% 4.4 5% 78.8%
--- -- ---- --
Total $84.9 100% $88.2 100% (3.8%)
===== ===== ===== ====
</TABLE>
(a) Includes the retail outlet stores.
Sales of men's apparel decreased by $6.8 million, or 8.2%, in the first quarter
of 1998, as compared to the first quarter of 1997. This decrease primarily
resulted from planned sales decreases of $8.7 million, including (i) $3.5
million for jeans, both Canyon River Blues and other labels, resulting from
higher initial shipments for new programs, which began in the first quarter of
1997, and reduced off-price sales resulting from a lower excess inventory
position in the first quarter of 1998, (ii) $2.9 million for dress shirts (other
than Perry Ellis) and (iii) $2.1 million related to the closure of the non-Perry
Ellis retail stores in the fourth quarter of 1997. In addition to the planned
sales decreases, the Company experienced approximately $2.8 million of other
sales decreases in various product categories, which were offset by sales
increases of Perry Ellis product lines of approximately $3.8 million.
Sales of children's sleepwear and underwear increased by $3.5 million, or 78.8%,
in the first quarter of 1998, as compared to the first quarter of 1997. This
increase was primarily a result of (i) the continuing expansion of the Joe Boxer
children's sleepwear and underwear product lines and (ii) an increase in the
sale of prior season goods carried over from last year. As previously announced,
the Company determined not to continue with its Joe Boxer sportswear line for
Fall 1998. This line accounted for net sales of $1.5 million in the first
quarter of 1998. The Company will continue with its Joe Boxer sleepwear and
underwear product lines.
Gross Profit
The following table sets forth the gross profit and gross profit margin (gross
profit as a percentage of net sales) for each of the Company's business segments
for the three months ended April 4, 1998 and March 29, 1997:
<TABLE>
Three Months Ended
<CAPTION>
April 4, 1998 March 29, 1997
(dollars in millions)
<S> <C> <C> <C> <C>
Men's Apparel $16.4 21.3% $19.0 22.7%
Children's Sleepwear and Underwear 0.5 6.5% 0.8 18.1%
---- ----
Total $16.9 19.9% $19.8 22.4%
===== =====
</TABLE>
The decline in gross profit in the men's apparel segment was primarily
attributable to the reduction in net sales discussed above. The decline in gross
profit margin was primarily due to the change in sales mix, with increased
off-price sales in the first quarter of 1998. These off-price sales are part of
the Company's continuing plan to reduce excess and out of season inventory more
expeditiously than in prior years, which also helps to improve liquidity.
The decline in gross profit margin in children's sleepwear and underwear was
primarily attributable to (i) the sale of prior season goods and (ii) the
underabsorption of manufacturing costs in the first quarter of 1998 related to
the planned shift of production closer to the order taking process. This shift
has also resulted in better control over the inventory position of the segment.
Selling, General and Administrative Expenses
As a result of initiatives begun in 1997, selling, general and administrative
("SG&A") expenses for the first quarter of 1998 decreased to $17.1 million
(20.2% of net sales) from $20.6 million (23.3% of net sales) for the first
quarter of 1997. The decrease primarily resulted from (a) a $2.0 million
decrease related to the closure of the non-Perry Ellis retail stores in the
fourth quarter of 1997, and (b) a reduction in advertising expenses of $0.8
million.
Reversal of Provision for Restructuring
In the first quarter of 1997, the Company reversed a previously recorded
restructuring provision of $0.8 million for net liabilities related to the
closure of the JJ. Farmer sportswear product line. These net liabilities were
settled for less than the carrying amount.
The cash portion of the remaining reserve for restructuring is expected to be
expended in the following manner: $1.1 million in the last three quarters of
1998 and $0.5 million in 1999.
Income from Operations Before Interest and Income Taxes
The following table sets forth income from operations before interest and income
taxes for each of the Company's business segments, expressed both in dollars and
as a percentage of net sales, for the three months ended April 4, 1998 and March
29, 1997
<TABLE>
Three Months Ended
<CAPTION>
April 4, 1998 March 29, 1997
(dollars in millions)
<S> <C> <C> <C> <C>
Men's Apparel (a) $3.8 4.9% $3.0 3.6%
Children's Sleepwear and Underwear (1.5) (18.8%) (1.0) (22.5%)
----- -----
2.3 2.7% 2.0 2.3%
Corporate expenses (2.5) (2.1)
Licensing division income 0.9 0.8
---- ----
Income from operations before
interest and income taxes $0.7 0.8% $0.7 0.8%
==== ====
</TABLE>
(a) Includes the reversal of restructuring charges of $0.2 million and $0.8
million in the first quarter of 1998
and 1997, respectively.
Interest Expense, Net
Net interest expense was $4.0 million for the first quarter of 1998 compared
with $3.4 million for the first quarter of 1997. The increase in interest
expense resulted from higher average borrowings during the first quarter of
1998, primarily due to the loss from operations over the past year.
<PAGE>
Discontinued Operations
In the first quarter of 1997, the Company recorded a loss of $0.8 million
related to the discontinuance of the Made in the Shade division. Net sales of
the division for the three months ended March 29, 1997 were $1.3 million.
Net Loss
In the first quarter of 1998, the Company reported a net loss of $3.3 million,
or $0.22 per share, as compared with a net loss of $3.5 million, or $0.23 per
share, in the first quarter of 1997.
Earnings Before Interest, Taxes, Depreciation, Amortization and
Restructuring Charges
Earnings before interest, taxes, depreciation, amortization and restructuring
charges was $2.90 million (3.4% of net sales) in the first quarter of 1998,
compared to $2.15 million (2.4% of net sales) in the first quarter of 1997, an
increase of $0.75 million, or 35%. The Company believes this information is
helpful in understanding cash flow from operations that is available for debt
service and capital expenditures. This measure is not contained in Generally
Accepted Accounting Principles and is not a substitute for operating income, net
income or net cash flows from operating activities.
Liquidity and Capital Resources
The Company is a party to a revolving credit, factoring and security agreement,
as amended (the "Credit Agreement"), with The CIT Group/Commercial Services,
Inc. ("CIT"). The Credit Agreement provides the Company with working capital
financing in the form of direct borrowings and letters of credit, up to an
aggregate of $120 million (the "Maximum Credit"), subject to an asset-based
borrowing formula. As collateral for borrowings under the Credit Agreement, the
Company has granted to CIT a security interest in substantially all of the
assets of the Company.
On March 3, 1998, the Company announced that it had reached an agreement in
principle (the "Restructuring Agreement") with its major note and equity holders
to restructure its existing indebtedness (the "Debt Restructuring") under its 10
1/2% Senior Secured Notes, due December 31, 1998 (the "Senior Secured Notes").
Under the Restructuring Agreement, the Company will convert the entire $104.9
million outstanding aggregate principal amount of, and all accrued and unpaid
interest on, its Senior Secured Notes into Salant Common Stock. The
Restructuring Agreement was entered into by the Company and Magten Asset
Management Corp. ("Magten"), the beneficial owner of, or the representative of
the beneficial owners of, approximately 67% of the aggregate principal amount of
the Senior Secured Notes. Apollo Apparel Partners, L.P., the beneficial owner of
approximately 39.6% of Salant Common Stock, is also a party to the Restructuring
Agreement and has agreed to vote all of its shares of common stock in favor of
the Debt Restructuring. The Restructuring Agreement provides that, among other
things, (i) the entire principal amount of the Senior Secured Notes, plus all
accrued and unpaid interest thereon, will be converted into 92.5% of the
Company's issued and outstanding common stock, and (ii) the Company's existing
stockholders will retain 7.5% of Salant Common Stock and will receive seven-year
warrants to purchase up to 10% of Salant Common Stock on a fully diluted basis.
Stockholder and noteholder approval will be required in order to consummate the
Debt Restructuring. The Restructuring Agreement also provides for a ten for one
reverse stock split, which will require the approval of the Company's
stockholders.
In contemplation of the Debt Restructuring, the Company elected not to pay the
interest payment of approximately $5.5 million that was due and payable under
the Senior Secured Notes on March 2, 1998, subject to a 30 day grace period.
Because the Company elected not to pay the interest due on the Senior Secured
Notes by the expiration of the applicable grace period, an event of default has
occurred with respect to the Senior Secured Notes, entitling the holders to
accelerate the maturity thereof. On April 8, 1998, the Trustee under the
indenture governing the Senior Secured Notes (the "Indenture") issued a Notice
of Default stating that as a result of the Company's failure to make the
interest payment due on the Senior Secured Notes, an event of default under the
Indenture had occurred on April 1, 1998. If holders of at least 25% in aggregate
principal face amount of the Senior Secured Notes accelerate all outstanding
indebtedness under the Senior Secured Notes pursuant to the terms of the
Indenture, such acceleration could result in the Company becoming subject to a
proceeding under the Federal bankruptcy laws. In accordance with the terms of
the Restructuring Agreement, Magten has provided a written direction to the
Trustee under the Indenture to forbear during the term of the Restructuring
Agreement from taking any action in connection with the failure by the Company
to make the interest payment on the Senior Secured Notes that was due and
payable on March 2, 1998. However, there is no assurance that the holders of 25%
or more of the Senior Secured Notes will not decide to accelerate the
outstanding indebtedness under the Senior Secured Notes prior to consummation of
the Debt Restructuring. In addition, the Company's working capital lender, CIT,
agreed to forbear until July 1, 1998, subject to certain conditions, from
exercising any of its rights or remedies under the Credit Agreement, arising by
virtue of the Company's failure to pay such interest on the Senior Secured
Notes. Implementation of the Debt Restructuring will result in the elimination
of $11.0 million of annual interest expense to the Company. There can be no
assurances, however, that the Debt Restructuring will be consummated. Failure to
consummate the Debt Restructuring could result in the acceleration of all of the
indebtedness under the Senior Secured Notes and/or the Credit Agreement.
Pursuant to the Credit Agreement, the interest rate charged on direct borrowings
is 0.75 percent in excess of the base rate of The Chase Manhattan Bank, N.A.
(the "Prime Rate", which was 8.5% at April 4, 1998) or 3.00% above the London
Late Eurodollar rate (the "Eurodollar Rate", which was 5.7% at April 4, 1998).
Pursuant to the Credit Agreement, the Company sells to CIT, without recourse,
certain eligible accounts receivable. The credit risk for such accounts is
thereby transferred to CIT. The amounts due from CIT have been offset against
the Company's direct borrowings from CIT in the accompanying balance sheets. The
amounts which have been offset were $10.7 million at April 4, 1998 and $13.3
million at March 29, 1997.
On April 4, 1998, direct borrowings (including borrowings under the Eurodollar
option) and letters of credit outstanding under the Credit Agreement were $44.6
million and $23.0 million, respectively, and the Company had unused availability
of $15.2 million. On March 29, 1997, direct borrowings and letters of credit
outstanding under the Credit Agreement were $32.9 million and $32.8 million,
respectively, and the Company had unused availability of $12.4 million. During
the first quarter of 1998, the maximum aggregate amount of direct borrowings and
letters of credit outstanding under the Credit Agreement was $81.1 million at
which time the Company had unused availability of $15.2 million. During the
first quarter of 1997, the maximum aggregate amount of direct borrowings and
letters of credit outstanding under the Credit Agreement was $71.8 million at
which time the Company had unused availability of $11.9 million.
The instruments governing the Company's outstanding debt contain numerous
financial and operating covenants, including restrictions on incurring
indebtedness and liens, making investments in or purchasing the stock, or all or
a substantial part of the assets of another person, selling property and paying
cash dividends. In addition, under the Credit Agreement, the Company is required
during the year to maintain a minimum level of stockholders' equity and to
satisfy a maximum cumulative net loss test. As previously discussed, at January
3, 1998, the Company was not in compliance with the two financial covenants
contained in the Credit Agreement, and has obtained a waiver from CIT, as of
January 3, 1998, as provided by an amendment to the Credit Agreement.
The indenture governing the Company's outstanding Senior Secured Notes requires
the Company to reduce its outstanding indebtedness (excluding outstanding
letters of credit) to $20 million or less for fifteen consecutive days during
each twelve month period commencing on the first day of February. This covenant
has been satisfied for the balance of the term of the Senior Secured Notes.
The Company's cash used in operating activities for the first quarter of 1998
was $10.6 million, which primarily reflects a $5.5 million increase in accounts
receivable and the loss from operations of $3.3 million.
Cash used for investing activities in the first quarter of 1998 was $0.8
million, which represented capital expenditures of $0.5 million and the
installation of store fixtures in department stores of $0.3 million. During
1998, the Company plans to make capital expenditures of approximately $10
million and to spend an additional $1.6 million for the installation of store
fixtures in department stores.
Cash provided by financing activities in the first quarter of 1998 was
$10.8 million, which represented
short-term borrowings under the Credit Agreement.
The Company's principal sources of liquidity, both on a short-term and a
long-term basis, are cash flow from operations and borrowings under the Credit
Agreement. Based upon its analysis of its consolidated financial position, its
cash flow during the past twelve months, and the cash flow anticipated from its
future operations, the Company believes that its future cash flows together with
funds available under the Credit Agreement, will be adequate to meet the
financing requirements it anticipates during the next twelve months, provided
that the Company consummates the Debt Restructuring and secures an extension of
the Credit Agreement or a new working capital facility. There can be no
assurance, however, (i) that the Company will consummate the Debt Restructuring
and secure an extension of the Credit Agreement or a new working capital
facility or (ii) that future developments and general economic trends will not
adversely affect the Company's operations and, hence, its anticipated cash flow.
Factors that May Affect Future Results and Financial Condition.
This report contains or incorporates by reference forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Where any such forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, the Company cautions that
assumed facts or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, there can be no assurance that the statement of the expectation or
belief will result or be achieved or accomplished. The words "believe",
"expect", "estimate", "project", "seek", "anticipate" and similar expressions
may identify forward-looking statements. The Company's future operating results
and financial condition are dependent upon the Company's ability to successfully
design, manufacture, import and market apparel. Taking into account the
foregoing, the following are identified as important factors that could cause
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company:
Substantial Level of Indebtedness and the Ability to Restructure Debt. The
Company had current indebtedness of $149.5 million as of April 4, 1998. Of this
amount, $104.9 million represents the principal amount of the Senior Secured
Notes. The Company will not generate sufficient cash flow from operations to
repay this amount at maturity. Accordingly, the Company is directing its efforts
towards implementing the Debt Restructuring as described above. Given the
Company's past inconsistent operating performance, together with the reluctance
of investors to invest in apparel companies suffering from high debt-to-equity
ratios and the Company's inability to raise funds in the capital markets to
re-capitalize the Company, absent the Debt Restructuring, the Company does not
believe it will be able to refinance its indebtedness under the Senior Secured
Notes. Failure by the Company to consummate the Debt Restructuring as
contemplated could result in the acceleration of all of the indebtedness under
the Senior Secured Notes and/or the Credit Agreement, and, thus, would be likely
to have a material adverse effect on the Company.
Competition. The apparel industry in the United States is highly competitive and
characterized by a relatively small number of multi-line manufacturers (such as
the Company) and a large number of specialty manufacturers. The Company faces
substantial competition in its markets from manufacturers in both categories.
Many of the Company's competitors have greater financial resources than the
Company. The Company also competes for private label programs with the internal
sourcing organizations of many of its own customers.
Apparel Industry Cycles and other Economic Factors. The apparel industry
historically has been subject to substantial cyclical variation, with consumer
spending on apparel tending to decline during recessionary periods. A decline in
the general economy or uncertainties regarding future economic prospects may
affect consumer spending habits, which, in turn, could have a material adverse
effect on the Company's results of operations and financial condition.
Retail Environment. Various retailers, including some of the Company's
customers, have experienced declines in revenue and profits in recent periods
and some have been forced to file for bankruptcy protection. To the extent that
these financial difficulties continue, there can be no assurance that the
Company's financial condition and results of operations would not be adversely
affected.
Seasonality of Business and Fashion Risk. The Company's principal products are
organized into seasonal lines for resale at the retail level during the Spring,
Fall and Holiday Seasons. Typically, the Company's products are designed as much
as one year in advance and manufactured approximately one season in advance of
the related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability of the Company to successfully
anticipate the needs of the Company's retail customers and the tastes of the
ultimate consumer up to a year prior to the relevant selling season.
Foreign Operations. The Company's foreign sourcing operations are subject to
various risks of doing business abroad, including currency fluctuations
(although the predominant currency used is the U.S. dollar), quotas and, in
certain parts of the world, political instability. Any substantial disruption of
its relationship with its foreign suppliers could adversely affect the Company's
operations. Some of the Company's imported merchandise is subject to United
States Customs duties. In addition, bilateral agreements between the major
exporting countries and the United States impose quotas, which limit the amount
of certain categories of merchandise that may be imported into the United
States. Any material increase in duty levels, material decrease in quota levels
or material decrease in available quota allocation could adversely affect the
Company's operations. The Company's operations in Asia, including those of its
licensees, are subject to certain political and economic risks including, but
not limited to, political instability, changing tax and trade regulations and
currency devaluations and controls. The Company's risks associated with the
Company's Asian operations may be higher in 1998 than has historically been the
case, due to the fact that financial markets in East and Southeast Asia have
recently experienced and continue to experience difficult conditions, including
a currency crisis. As a result of recent economic volatility, the currencies of
many countries in this region have lost value relative to the U.S. dollar.
Although the Company has experienced no material foreign currency transaction
losses since the beginning of this crisis, its operations in the region are
subject to an increased level of economic instability. The impact of these
events on the Company's business, and in particular its sources of supply and
royalty income cannot be determined at this time.
Dependence on Contract Manufacturing. In 1997, the Company produced 59% of all
of its products (in units) through arrangements with independent contract
manufacturers. The use of such contractors and the resulting lack of direct
control could subject the Company to difficulty in obtaining timely delivery of
products of acceptable quality. In addition, as is customary in the industry,
the Company does not have any long-term contracts with its fabric suppliers or
product manufacturers. While the Company is not dependent on one particular
product manufacturer or raw material supplier, the loss of several such product
manufacturers and/or raw material suppliers in a given season could have a
material adverse effect on the Company's performance.
<PAGE>
Year 2000 Compliance. The Company has completed an assessment of its information
systems ("IS"), including its computer software and hardware, and the impact
that the year 2000 will have on such systems and Salant's overall operations.
The Company's current software systems, without modification, will be adversely
affected by the inability of the systems to appropriately interpret date
information after 1999. As part of the process of improving the Company's IS to
provide enhanced support to all operating areas, the Company has entered into an
interim working agreement with Electronic Data Systems Corporation ("EDS"),
which constitutes the initial phase of a long-term contract to outsource its IS.
Such long-term outsourcing contract will provide for or eliminate any issues
involving year 2000 compliance because all software provided under the
outsourcing contract will be year 2000 compliant. The Company anticipates that
its cost for such outsourcing will be approximately $9.0 million annually, which
is consistent with Salant's current IS expenditures. The Company anticipates
that it will complete its outsourcing and systems conversion in time to
accommodate year 2000 issues. If the Company fails to complete such conversion
in a timely manner, such failure will have a material adverse effect on the
business, financial condition and results of operations of the Company.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered to be a reliable indicator of future performance, and
investors are cautioned not to use historical trends to anticipate results or
trends in the future. In addition, the Company's participation in the highly
competitive apparel industry often results in significant volatility in the
Company's common stock price.
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In contemplation of the Debt Restructuring, the Company elected not to pay the
interest payment of approximately $5.5 million that was due and payable under
the Senior Secured Notes subject to a 30 day grace period. Because the Company
elected not to pay the interest due by the expiration of the applicable grace
period, an event of default has occurred, entitling the holders to accelerate
the maturity thereof. On April 8, 1998, the Trustee under the Indenture issued a
Notice of Default stating that as a result of the Company's failure to make the
interest payment, an event of default under the Indenture had occurred on April
1, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
During the first quarter of 1998, the Company filed one Form 8-K dated March 4,
1998, reporting (i) an agreement in principle with its major note and equity
holders to restructure its existing long term debt, and (ii) an agreement with
its working capital lender to extend the financing under its current credit
agreement.
Exhibits
Number Description
27 Financial Data Schedule
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALANT CORPORATION
Date: May 15, 1998 /s/ Philip A. Franzel
-------------- -----------------------
Philip A. Franzel
Executive Vice President
And Chief Financial Officer
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